A Guide to Applying for an SFC License

SFC Licensing Framework

The Securities and Futures Ordinance (“SFO”) establishes licensing requirements for both firms and individuals acting on behalf of firms.

Firms: Licensed Corporations

Unless exempted, the SFO requires a firm carrying on a business in a “regulated activity” (or holding itself out as doing so) to be licensed by the SFC. There are currently 10 types of regulated activities under the SFO. They are:-

Individuals: Licensed Representatives & ROs

Unless exempted, the SFO requires an individual who performs a “regulated function” in relation to a regulated activity carried on as a business (or holds himself out as doing so) to be licensed by the SFC as a licensed representative. In broad terms, a regulated function means any function performed other than work ordinarily performed by an accountant, clerk or cashier.

Each licensed representative must be accredited to a firm which is itself licensed by the SFC (i.e. an SFC licensed corporation). In some cases, a licensed representative must be approved by the SFC as a responsible officer.

SFC License Requirements for Activities Outside Hong Kong

The SFC license requirements extend to a firm actively marketing, whether by itself or another person on its behalf, to the Hong Kong public any services that it provides, which would constitute a regulated activity if provided in Hong Kong. This is so whether the firm does so in Hong Kong or from a place outside Hong Kong.

The “active marketing” provisions of the SFO are notoriously uncertain and the Hong Kong courts have been called upon to resolve the ambiguity as to how these provisions might apply to offshore activities (i.e. activities outside of Hong Kong) and hence, when such offshore activities may be subject to Hong Kong SFC licensing requirements. Despite these judicial decisions, there remain practical difficulties in some cases in determining when the active marketing provisions will trigger SFC licensing requirements.

A corporation or an individual can be licensed by or registered with the SFC for one or more of the 10 regulated activities under the SFO. The more commonly encountered regulated activities are:

SFC License Type 1: Dealing in Securities

In broad terms, the SFO defines “dealing in securities” as making or offering to make an agreement with another person, or inducing or attempting to induce another person to enter into or to offer to enter into an agreement:

•  for or with a view to acquiring, disposing of, subscribing for or underwriting securities; or
• the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities.

A securities brokerage firm will normally be carrying on a Type 1 regulated activity and its brokers, dealers and sales traders will normally have to be licensed representatives accredited to it.

There are a number of applicable exemptions. In practical terms, the most significant exemption to Type 1 regulated activity is the principal dealing exemption, sometimes known as the professional investor exemption. This exemption exempts a person from having to apply for a Type 1 license if the person, as principal, acquires, disposes of, subscribes for or underwrites securities, or performs such act by way of dealing with a person who is a professional investor. Professional investors generally include institutional investors.

SFC License Type 2: Dealing in Futures Contracts

In broad terms, the SFO defines “dealing in futures contracts” as:

• making or offering to make an agreement with another person to enter into, or to acquire or dispose of, a futures contract;
• inducing or attempting to induce another person to enter into, or to offer to enter into, a futures contract; or
• inducing or attempting to induce another person to acquire or dispose of a futures contract.

A futures brokerage firm will normally be carrying on a Type 2 regulated activity and its brokers, dealers and sales traders will normally have to be licensed representatives accredited to it.

SFC License Type 4 and Type 5: Advising on Securities or Futures Contracts

In broad terms, the SFO defines “advising on securities” and “advising on futures contracts” respectively as:

• giving advice on whether, which, the time at which, or the terms or conditions on which, securities or futures contracts (as the case may be) should be acquired or disposed of or entered into (as the case may be); or
• issuing analyses or reports, for the purposes of facilitating the recipients of the analyses or reports to make decisions on whether, which, the time at which, or the terms or conditions on which, securities or futures contracts (as the case may be) should be acquired or disposed of or entered into (as the case may be).

Investment advisory firms who provide research analyses or reports on securities or futures contracts to clients will normally be carrying on a Type 4 or Type 5 regulated activity (as the case may be) and their research analysts will normally have to be licensed representatives accredited to it.

There are a number of important exemptions from Type 4 and 5 regulated activity. For example:

• The group company exemption exempts a corporation from having to apply for a Type 4 or 5 license if it provides advice solely to its wholly owned subsidiaries, its holding company which holds all its issued shares, or other wholly owned subsidiaries of that holding company. There are known concerns as to whom advice is being given where the recipient may not be the final beneficiary of the advice and reliance should not be placed on this exemption without proper legal advice.
• The incidental exemption exempts a person licensed for Type 1 (dealing in securities) or Type 2 (dealing in futures contracts) who wishes to advise on securities or futures contracts from having to apply for a Type 4 or Type 5 license, provided that these activities are carried out wholly incidental to its securities or futures dealing business. This exemption may apply, for example, to securities or futures brokers who provide investment advice for their securities or futures brokerage clients. There are difficult questions as to what constitutes “wholly incidental” in this context to qualify for exemptive relief. Accordingly, anyone intending to rely upon this exemption should take considered legal advice.
• The incidental exemption also exempts an asset manager licensed for Type 9 regulated activity (asset management) from having to apply for a Type 4 or Type 5 license if the asset manager advises on securities or futures contracts solely for the purpose of its asset management business which involves the management of a portfolio under a collective investment scheme. This exemption may apply, for example, to fund managers who provide investment advice or research reports to clients.

SFC License Type 9: Asset Management

In broad terms, the SFO defines “asset management” as real estate investment scheme management or securities and futures contract management. The latter includes providing a service of managing a portfolio of securities or futures contracts for another person.

As a hedge fund manager will normally exercise investment discretion on behalf of the hedge fund, it will normally be carrying on a Type 9 regulated activity and its portfolio managers will normally have to be licensed representatives accredited to it.

There are a number of applicable exemptions. One important exemption is for incidental activities. Under this exemption, a person licensed for Type 1 (dealing in securities) or Type 2 (dealing in futures contracts) may be exempt from having to apply for a Type 9 license if its asset management activities are carried out wholly incidental to its securities or futures dealing business. This exemption may apply, for example, to securities or futures brokers who manage discretionary accounts for their securities or futures brokerage clients. As noted in the context of Type 4 and 5 regulated activity, there are difficult questions as to what constitutes “wholly incidental” for the purposes of qualifying for exemptive relief. As a result, it is important for anyone intending to rely upon this exemption to take proper legal advice.

SFC License Type 10: Providing Credit Rating Services

Firms carrying on a business in providing credit rating services or setting up credit rating agencies in Hong Kong must, unless exempted, be licensed.

Do I need an SFC License for Private Equity?

Historically, the SFC had taken what appeared to be a relaxed approach to the licensing of private equity firms. A significant number of private equity firms operating in Hong Kong are not licensed.

Of those which are licensed, there has been a wide divergence in the approaches adopted. Some private equity firms are licensed for Type 1 (dealing in securities), some are licensed for Type 4 (advising on securities), and others are licensed for Type 9 (asset management).

However, recent enforcement action by the SFC may signal a possible change in the SFC’s approach to licensing private equity firms. As a result, it is particularly important that private equity sponsors considering establishing operations in Hong Kong take legal advice as to whether or not they need to be licensed by the SFC.

Do I need an SFC License to Trade or Manage Digital Assets?

As the regulatory framework of the SFO is primarily concerned with securities and futures contracts as defined, the SFC has no power to license or supervise virtual asset portfolios managers (i.e. asset managers who are managing portfolios exclusively comprised of digital assets which constitute neither securities nor futures contracts) or trading platform operators that only trade virtual assets or tokens which constitute neither securities nor futures contracts.

However, in 2018, the SFC announced a conceptual framework for the regulation of virtual asset trading platforms through an opt-in sandbox approach. As a result of its experience with the sandbox, the SFC refined its approach and in 2019, the SFC published a position paper to propose a framework for regulating platforms trading both security and non-security tokens, the latter on an opt-in basis.

How Do I Qualify For An SFC License?

Under the SFO, a primary consideration for the SFC in determining whether to approve an SFC licensing application is whether the applicant is fit and proper. This fitness and properness test applies to both firms and individuals but the manner in which it applies to firms is different than the manner in which it applies to individuals.

In determining fitness and properness, the SFC will have regard to a number of matters, including those set out in its Fit and Proper Guidelines. These matters include the following.

Financial Status and Solvency

The SFC is not likely to be satisfied that a firm is fit and proper if it is subject to receivership or similar proceedings, has failed to meet any judgment debt, or is unable to meet any financial or capital requirements applicable to it.

In the case of an individual seeking to be licensed, the SFC is not likely to be satisfied that he is fit and proper if he is an undischarged bankrupt or is currently subject to bankruptcy proceedings. For a bankrupt who has recently been discharged, the SFC will have regard to the recency and circumstances of the discharge.

Education, Qualifications or Experience

An individual applying to be a licensed representative or to be approved as a responsible officer must demonstrate that he or she is competent to perform his or her proposed regulated activities efficiently and effectively. When assessing competence, the SFC will take into account the nature of the functions which the applicant will perform with reference to his academic and industry qualifications and relevant experience.

In this regard, the SFC has set out its general expectations in its Guidelines on Competence. For example, an individual applying to be a licensed representative must demonstrate knowledge of the Hong Kong regulatory framework and should have relevant professional or academic qualifications in designated fields (i.e. accounting, business administration, economics, finance or law), failing which he or she will need to pass recognized industry qualification exams or gain a prescribed number of years of relevant industry experience.

The Hong Kong Securities Institute (HKSI) offers a range of licensing exam papers (“LE Papers”) which have been approved by the SFC for the purpose of determining whether an individual meets the competence requirements in relation to the type of SFC license he is applying for. These LE Papers include regulatory papers (Papers 1 to 6) for meeting local regulatory framework knowledge requirements and technical papers (Papers 7 to 12) which can be used as recognized industry qualifications.

Competence and Honesty

Both firms and individuals applying to be licensed by the SFC must demonstrate the ability to carry on the regulated activity competently, honestly and fairly and in compliance with all relevant laws.

For example, a corporation must satisfy the SFC that its organizational structure and personnel are adequate to comply with the relevant legislative and regulatory requirements, and that it has the infrastructure and internal control systems to manage risk effectively, avoid conflict of interest and provide a proper audit trail.

Reputation, Character, Reliability and Financial Integrity

The SFC is not likely to be satisfied that a corporation is fit and proper if it is found to be of poor reputation or reliability, lacking in financial integrity or has been served with a winding up petition.

In the case of an individual seeking to be licensed, factors which the SFC will consider in determining fitness and properness include, for example, whether the individual has been subject to any director disqualification orders, or whether the individual has been censured, disciplined or disqualified by any professional or regulatory body in relation to any trade, business or profession.

The SFC is not likely to be satisfied that a corporation is fit and proper if its key personnel (e.g. managers, officers and directors), non-executive directors, substantial shareholders or other controllers fail to meet the Fit and Proper Guidelines.

What Personnel Do I Need To Qualify For An SFC License

Minimum of 2 ROs

A licensed corporation must appoint at least 2 responsible officers to directly supervise each regulated activity for which the corporation is licensed. One of these responsible officers must be an executive director (i.e. a member of the board of directors of the corporation).

For each regulated activity, there should be at least 1 responsible officer available at all times to provide supervision. The same individual may be appointed as a responsible officer for more than 1 regulated activity, provided that he is fit and proper for each of the roles assumed.

Potential responsible officer candidates will have to meet responsible officer qualifications to be approved by the SFC. 

Identify MICs

A licensed corporation must appoint at least 1 individual as the manager-in-charge for each of the following 8 core functions, namely:

• Overall management oversight
• Key business line
• Operational control and review
• Risk management
• Finance and accounting
• Information technology
• Compliance
• Anti-money laundering and counter-terrorist financing

A person may serve as a manager-in-charge for more than one of the core functions.

Under the manager-in-charge regime, individual managers may be held accountable to the SFC for the firm’s compliance with regulatory standards even though such managers may not be licensed by the SFC. In other words, the SFC may take disciplinary action against such managers even though they are not SFC licensed. The SFC’s position incentivizes these managers to manage prudently to minimize their personal liability.